Bad Deal For South Euclid

What economic impact will the
proposed Oakwood Commons shopping center have on the City of South Euclid? This
key question has not been adequately addressed by the City or FISE (the
developer).

Our goal here is to estimate
annual City revenue based on simple common sense reasoning and publicly
available data. As we proceed with the calculations, keep in mind that FISE has
consistently characterized Oakwood Commons as a value-oriented big-box strip
mall with out-parcel restaurants (including drive-thrus).

The revenue to the City has
three components: property taxes, personal income taxes, and costs. The overall
revenue is just the sum of the property tax and income tax components, minus the
costs.

FISE predicts that Oakwood
Commons will have a market value of $45M.[1] Let’s
assume this is accurate. The Oakwood Commons land sits in South Euclid, but it
is in the CH/UH School District. The overall property tax rate is 3.97% of
market value, but only 11.55% of this 3.97% goes to the City; the rest goes to
the county, and the CH/UH schools and libraries.[2] So the property tax revenue
to the City from Oakwood Commons will be $45M x 0.0397 x 0.1155 = $206k per year.

FISE predicts that Oakwood
Commons will have a total floor space of 325,000 square feet.[1] Let’s assume this is accurate. Strip malls typically
employ one full-time-equivalent worker per 818 square feet of floor space, so
Oakwood Commons can be expected to support about 325,000 / 818 = 397
workers.[3]

The average wage of a worker
at a value-oriented strip mall with out-parcel restaurants is typically $13 per
hour ($27k per year).[4] The income tax rate of South
Euclid is 2%.[5] Putting all of this together we can estimate that the income
tax revenue to the City from Oakwood Commons will be 397 x $27k x 0.02 = $199k per year.

If built, the Oakwood Commons
strip mall will impose certain costs on the City. The most significant costs
will be for police, road and traffic systems maintenance, and administration.
Neither the City nor FISE have made any attempt to estimate these costs.

Fortunately, a number of other
Ohio cities have conducted so-called Fiscal Impact Analyses (FIAs) of various types of development, such as housing,
retail and office parks. The details of one of these studies are publicly
available: Dublin, Ohio found (in 2007) that its municipal costs for retail
development were $1.514 per square foot of floor space per year.[6] Like South Euclid, Dublin is a suburb of a large Ohio
city, and the cost of living index in each city is nearly the same.[7] So we
expect the costs for police, road and traffic systems maintenance, and
administration in South Euclid to be comparable to those measured in Dublin. We
can estimate that the costs to the City of South Euclid from Oakwood Commons
will be 325,000 x $1.514 = $492k per
year.

We are now in a position to
estimate the total revenue to the City from Oakwood Commons: $206k + $199k -
$492k = - $87k per year. Please note the negative sign: it means that if Oakwood Commons is built we can expect
it to cost the City about $87,000 per year!

Reality Check
#1

How can it be that building a
shopping center actually costsa city money? Surely this cannot be the norm?

Actually, it is the norm. In 2004 the Mid-Ohio
Regional Planning Commission analyzed FIAs from eight
Ohio communities and found that the net impact of retail development was negative in seven of the eight. The
average cost to cities per square foot of retail development was $0.44 per
square foot per year.[8] Applying this figure to
Oakwood Commons predicts an annual loss for the City of South Euclid of 325,000
x $0.44 = $143k.

It is the norm for retail
developments to cost cities money. South Euclid will be lucky if the cost is
only $87,000 per year.

Reality Check
#2

But FISE claims Oakwood
Commons will generate $500k per year for the City.[9]
How can the developer be that wrong?

It’s simple: FISE inflates the estimate of the number of
workers, and fails to include any costs.

In their Application for
Rezoning submitted to the City of South Euclid, FISE estimates that Oakwood
Commons would employ about 400 full-time-equivalent workers.[1] This is
consistent with our estimate of 397. However, in their public literature they
use a figure of 700 jobs. Why? They explain:

These figures
include direct employment; "indirect" employment created in the local supply
chain; and "induced" employment created in industries that supply goods and
services to the workers (dry cleaners, accountants,
etc.).[10]

So, for every 4 jobs at
Oakwood Commons FISE predicts there will be 3 new jobs
created elsewhere in South Euclid. No
supporting evidence is given for this extraordinary claim. And FISE fails to
acknowledge that Oakwood Commons will compete with other South Euclid
businesses, likely forcing some to downsize. As a concrete example, consider
Marc’s and Giant Eagle: do you think these businesses will be helped or hurt by
Oakwood Commons? Will the “indirect” and “induced” employment effects outweigh
the “downsizing” effects? Maybe, maybe not. But one
must wear a very rosy pair of glasses to believe 400 jobs will turn into 700
jobs.

The proponents of Oakwood
Commons claim it will enrich the City. However, careful analysis of both taxes
and costs leads to the opposite conclusion: it will make the City poorer. This
is not a unique result for South Euclid: retail development in today’s economy
is a losing proposition for most cities.

But this does not mean South
Euclid cannot prosper from the Oakwood land. Indeed, FIAs consistently show that other types of development –
such as office parks and senior housing – tend to be winning propositions. The
Oakwood land is the last large undeveloped parcel in South Euclid: it must not
be squandered. South Euclid can be a winner if it holds out for a smarter
development plan.

(Download and print out a shorter version of Bad News for South Euclid at the end of this post.)

References

[1] Application
for rezoning submitted by FISE to the City of South Euclid (2010). (hyperlink)

[3]
Estimate of number of workers based on floor space from the Energy Information
Administration (1995). (hyperlink)

[4]
Annual retail wage estimate from the National Retail Federation. The value used
is a blend of the values given for “retail” and “food service” for 2010. As a
value-oriented big-box strip mall, wages for Oakwood Commons would be expected
to fall below the given national averages. (hyperlink)